Energy Transfer Partners LP: Unique Energy Play with an 11.3% Yield
A Generous Energy Stock You Likely Haven’t Considered
After a serious tumble over the last several years, oil prices are now making a comeback. As a result, many investors have started to check out companies in the oil and gas industry again.
Obviously, different investors will likely have different risk profiles and investment goals. But if your goal involves earning an oversized income stream, few energy stocks can do a better job than Energy Transfer Partners LP (NYSE:ETP).
Let me explain…
As its name suggests, this partnership is in the energy transportation business. Headquartered in Dallas, Texas, it owns and operates a diversified portfolio of midstream energy assets.
Today, the No. 1 reason for investors to consider ETP stock is its generous distribution policy. With a quarterly payout of $0.5650 per unit, Energy Transfer Partners offers an annual distribution yield of 11.1% at the current price.
Now, you are probably thinking that this must be another beaten-down high yielder in the oil and gas industry. Because dividend yield moves in the opposite direction to a company’s stock price, the downturn in energy stocks in the past several years has created quite a few double-digit yielders.
However, while it’s true that ETP stock hasn’t been a market favorite, the downturn in the partnership’s unit price is not the only reason behind its high yield. The other reason is that Energy Transfer Partners has consistently raised its payout.
Energy Transfer Partners LP Delivers Increasing Distributions
Consider this: in 2013, Energy Transfer Partners paid total dividends of $1.1738 per unit. By 2017, the total payment had grown to $2.17 per unit. That translated to an increase of 84.9%. (Source: “Distribution History,” Energy Transfer Partners LP, last accessed July 19, 2018.)
Just think about that for a second. Oil and gas prices plunged big-time in 2014 and 2015. They have yet to make a full recovery. As a result, quite a few energy companies had to cut back their dividends. However, despite strong commodity price headwinds, Energy Transfer Partners was still raising its distributions to unitholders.
Of course, delivering substantial payout increases in an industry-wide downturn might seem a bit risky. But note this: Even after consistent distribution hikes, ETP stock still offers top-notch dividend safety.
A Double-Digit Yield That’s Surprisingly Safe
And that’s largely due to the partnership’s growing financials. In 2017, Energy Transfer Partners generated total revenues of $29.1 billion, marking a 33.1% increase from 2016. Distributable cash flow, a critical measure of an energy partnership’s performance, increased 15.8% year-over-year on an adjusted basis to $4.2 billion. (Source: “Energy Transfer Partners Reports Fourth Quarter Results,” Energy Transfer Partners LP, February 21, 2018.)
Since ETP paid total distributions of $3.5 billion for the year, it achieved a distribution coverage ratio of 1.2-times.
In other words, the partnership generated 20% more cash than what was needed to meet its distribution obligations for 2017. This has left a sizable margin of safety.
Growth has continued to this year. In the first quarter of 2018, Energy Transfer Partners’ revenue increased another 20.1% year-over-year to $8.3 billion. Distributable cash flow came in at $1.2 billion for the quarter, a 29.4% improvement from the year-ago period. (Source: “Energy Transfer Partners Reports First Quarter Results,” Energy Transfer Partners LP, May 9, 2018.)
Again, the partnership’s $1.2-billion distributable cash flow provided more than enough coverage of its total distributions of less than $1.1 billion paid for the period.
Bottom Line on ETP Stock
Don’t forget, ETP focuses on providing fee-based services. The partnership owns and operates tens of thousands of miles of natural gas pipelines, as well as multiple strategically positioned natural gas processing and storage facilities.
And thanks to its investment in Sunoco LP (NYSE:SUN), ETP also has thousands of miles of crude oil, natural gas liquid (NGL), and refined products pipelines and associated storage facilities.
With these storage, transportation, and processing assets, Energy Transfer Partners can generate stable cash flows despite fluctuations in commodity prices. For instance, in the partnership’s Interstate Natural Gas Transportation & Storage segment, approximately 95% of its revenue comes from reservation fee contracts. (Source: “J.P. Morgan 2018 Energy Conference,” Energy Transfer Partners LP, June 19, 2018.)
While the partnership has yet to raise its payout in 2018, management said that this temporary suspension in distribution growth was to “alleviate equity funding needs and reduce leverage.” (Source: Ibid.)
At the end of the day, commodity prices will likely remain volatile, and it’s hard to say where ETP stock is going to go in the next trading session. But when it comes to providing investors with a safe and substantial stream of cash distributions, few companies can match this energy partnership.